FTC to Host Workshop on Alternative Mortgages on May 24

March 24, 2006

Related Information

Protecting Consumers in the New Mortgage MarketplaceAnnouncement of Public Workshop to Explore Consumer Protection Issues Arising From The Emergence of "Nontraditional" or "Alternative" Mortgage Products in the U.S. Residential Mortgage Marketplace, and Request for Participation [pdf]

On May 24, the Federal Trade Commission will host a workshop, Protecting Consumers in the New Mortgage Marketplace, on consumer protection issues arising from the growth of “nontraditional” or “alternative” mortgage products in the residential mortgage marketplace.

As housing prices have soared in recent years, alternative mortgage products, such as “interest-only” loans and payment option adjustable rate mortgage (ARM) loans (or “pick-a-payment” loans), have grown increasingly prevalent. These types of loans were less than one percent of mortgages in 2000, yet they comprised up to half of new loans last year.

These mortgage products may provide benefits for many consumers. The products may help some people buy homes at prices they could not afford using traditional thirty-year, fixed rate mortgages, because the minimum monthly payments required during the initial periods of these loan products are much lower. Moreover, these mortgage products may especially benefit certain consumers, such as those with an uneven pattern of income or those anticipating a rise in income.

At the same time, these mortgage products may present unexpected risks for consumers. Consumers may not adequately understand that such mortgages could result in “payment shock,” when minimum monthly payment amounts jump by as much as 100 percent upon expiration of a loan’s initial period. They also may not understand that some of these loans may yield negative amortization (a rise in the loan balance because mortgage payments are less than the interest due). Because these products let borrowers defer repayment of principal, borrowers build no equity in their homes except to the extent that their homes appreciate in value. Therefore, such loans may be particularly risky under changing market conditions.

The workshop will explore various aspects of the home mortgage marketplace, including how these mortgage products have evolved, the benefits and risks they pose for consumers, how market forces shape the prevalence of particular mortgage products, and consumer understanding of the terms, features, risks, and benefits of these loans.